Despite Slump, Some Small Firms Add 401(k)s

But the New Plans May Come With Trade-Offs, Such as Delayed Employer Matches and a Moratorium on Raises

By

Arden Dale

Updated Feb. 10, 2009 11:59 p.m. ET

Even as the recession is taking its toll, some small-business owners are adopting 401(k)s for their employees.

They see the plans as a way to retain valued workers and get people who otherwise wouldn't save for retirement to do so. But to be able to afford the plans, some companies are having to make some trade-offs, including delaying employer matches or offering the matches in lieu of raises.

Even with the unemployment rate exceeding 7%, retention of key people is still an important issue for small businesses, says Rick Meigs, president of 401khelpcenter.com LLC, a Portland, Ore.-based nonpartisan group that tracks 401k trends. "Employees...want to work for firms that help them meet other life goals like saving for retirement." But small firms have to be "pretty creative" about keeping 401(k) costs down, he adds.

ENLARGE

Employees frosting cupcakes at Hokulani Bakeshop in Honolulu, which started offering a 401(k) plan this year.
Hokulani Bakeshop

According to a survey of 3,000 householders reported in December by the Investment Company Institute, a mutual-fund industry trade group, 43% of the 1,575 households with defined-contribution plans said they probably wouldn't save for retirement if they didn't have a retirement plan at work.

Christy & Main started offering a 401(k) last month to its five employees. But given the harsh economy, the distributor of work apparel has taken a conservative approach. Employees are making weekly contributions, but aren't getting an employer match -- for now. Bruce Main, the company's secretary treasurer, says Christy & Main will only contribute to the plan, run by ShareBuilder401(k), at the end of 2009 if it can.

"Everything we put in is based on profitability," he says. Last year, sales at the Marietta, Ga.-based company were up about 6% from 2007 and the company was able to cut expenses by 5%.

Mr. Main says he sat down with employees and told them that "this is the best possible time to have a 401(k)" because stocks are cheap -- emphasizing that rather than getting a cash bonus at the end of the year that would likely vanish quickly, employees could start building a nest egg. All five workers signed on.

"It's not a noticeable change out of my paycheck," says Tracy McWilliams, who does customer service and bookkeeping at the firm. "But at the same time, I have money being put away."

Employees at Hokulani Bakeshop in Honolulu can contribute to a 401(k) starting this month. Tushar Dubey, the owner of the three-year-old store, which specializes in sugar cookies and cupcakes, says the plan is both a savings vehicle for himself and his wife and a way to retain his trusted staff.

Mr. Dubey paid about $420 to set up a ShareBuilder Roth 401(k), which is run by ShareBuilder401(k), and has a small monthly maintenance fee. He is matching employee contributions up to 4%. To keep costs down, however, workers won't get a pay raise this year. He pays a monthly salary of $2,000 each to his four full-time employees, himself and his wife.

Mr. Dubey hopes that as business picks up he will be able to add raises on top of the plan. "My wife let me do this because it cost less than giving everybody a $500-per-month raise," he says. The shop brings in about about $45,000 in revenue each month. Mr. Dubey says sales for January were up 15% over the same period a year earlier.

All five employees who qualify to join the plan have done so. One, 31-year-old Bethanie Chang, who works in customer service and is co-director of retail at the bake shop, says while she would like a raise, she thinks the plan is important as well. "We're not getting paid a whole lot, so this helps," says Ms. Chang, who also has an individual retirement account. She likes having money go directly into the 401(k) account so she doesn't have to think about it. "It's just budgeted for me in advance," she says.

More financial firms, including ShareBuilder401(k), Principal Financial Group Inc.,PFG0.40% Fidelity Investments, Vanguard Group and Web-based The Online 401(k) are offering 401(k) plans geared toward small companies.

Vanguard started its Individual 401(k) in November to meet client interest, says Elizabeth Kerwood, principal in Vanguard's Retail Services group, who oversees the product.

Stuart Robertson, general manager of ING Direct's ShareBuilder Advisors LLC, which runs ShareBuilder401(k), says sales of the company's 401(k)s were up 33% last year from 2007, even as the market soured in September. The average company ShareBuilder works with has nine or 10 employees.

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